James Surowiecki raises some interesting points in a column in this week’s New Yorker magazine on why big US banks are getting even bigger and more powerful as a result of the financial crisis.
The simple answer is that the combination of a series of banking mergers and the disappearance of competitors such as Lehman Brothers left the surviving institutions in much better shape than before.
Reinforcing this, the government allowed – or even encouraged bigger banks to take over the weaker ones, eg, JPMorgan acquiring WaMu and Bear Stearns, Wells Fargo acquiring Wachovia, and the now infamous Bank of America-Merrill Lynch merger (though we’re not sure the last one made anybody “stronger”).
The upshot, Surowiecki reminds us, is that institutions already too big to fail became even bigger, as outlined in an August report he recommends by the Washington Post’s David Cho.
But the key question here, he says, is why the remaining players have found it so easy to hold onto their customers, both old and new. What makes this even more curious, he notes, is that “the big banks, which have historically offered their customers worse deals than smaller banks, have not changed their ways: they pay less for deposits, charge more for loans, make billions from overdraft fees, and have jacked up credit-card rates”.
He ventures that two key factors can keep customers loyal, one is the relatively high costs to customers of switching banks, and related to that, the fees banks charge non-customers for using ATM machines. Indeed, a web search on “switching banks” yields endless information and “how to switch banks” and also a vast range of offers from banks trying to persuade customers to ditch their existing banks.
Beyond retail banking, the key factor motivating customers in the field of investment banking is reputation, concludes Surowiecki.
All of which suggests that the bottom line for all those supposedly loyal US bank customers, both individual and corporate, is really just a lack of attractive choices.
However, a recent survey from a small banking research firm in Australia also makes sense. According to a poll of banks’ business customers by East & Partners, businesses are becoming increasingly dissatisfied with their banks but are choosing to stick with their existing ones rather than moving to test the competition.
As AAP reported last week, the survey found that the proportion of businesses intending to change banks in the next three to six months had more than halved to 16.5 per cent in September, compared with a year ago. But at the same time, the customer satisfaction rating on a scale of 10 points fell to 4.79 in September 2009, well down from the 5.50 recorded a year earlier.
The reason that businesses were prepared to stick with an unsatisfactory bank, the poll found, was that many managers believed they stood a better chance of securing credit on good terms from their existing bank.
These kind of findings suggest that as soon as credit eases, you might see an ebb and flow of customers from various banks. Then again, if you read things like Marshall Auerback’s post on Clusterstock on Monday (Banker pay curbs are a devious scheme to deceive the taxpayer), you might just want to go and stash your money under a mattress.
Related links:
The Big Banks Get Bigger – FT Alphaville